China has gone through an exciting ride when it comes to cryptocurrencies. A few years ago, China used to be among the largest players in the world of virtual currencies such as Bitcoins. Nonetheless, the Chinese government has shifted from legalizing cryptocurrency trading to imposing some of the strictest bans in the world over the years. On the other hand, Hong Kong is growing as a region favorable to cryptocurrencies compared to mainland China.
This feature article will dive into this process and discover why China has such an ambiguous approach to cryptocurrency.
China’s Early Days in the Crypto World
When the 2010s started, cryptocurrency was in its infancy, and China seized the opportunity to become one of the largest centers for Bitcoin trading and mining. In its simplest sense, mining is the process of creating new bitcoins. China had what the miners needed to operate efficiently and effectively – cheap power to run the mining equipment. Over the past few years, over 70% of all the global Bitcoin mining has been done in China.
China Dominates Bitcoin Mining Despite 2021 Crypto BanThe government was receptive to blockchain, the technology that underpins cryptocurrency. It recognized the potential in its use, for example, in record keeping. However, the Chinese government was also very careful because unlike the Yuan, which is China’s national currency, it did not have control over cryptocurrencies.
Why Did China Ban Cryptocurrency?
In 2017, the Chinese government decided to prohibit ICOs, events in which new cryptocurrencies were sold to the public. These events soon became known as scams because many new projects were intended to defraud investors of their funds. China outlawed ICOs to shield people from scammers.
Over time, the government saw other issues with cryptocurrency, which led to stricter bans:
Financial Stability: Cryptocurrencies are not regulated by the government as they do not exist within the conventional banking system. This lack of control was a problem for the Chinese government.
Capital Flight: Others were using cryptocurrencies for money remittance to avoid Chinese rules on how much money can be taken out of the country. This is known as capital flight, and it is not good for a country.
Environmental Concerns: Mining Bitcoin consumes a lot of energy which is not commendable with China’s pollution control policies.
China banned all crypto transactions by 2021, arguing that cryptocurrency was a high-risk asset to the economy. This ban included buying, selling, mining, or any other activity involving cryptocurrencies.
Cryptocurrency and Crime Risks
The fear of crime was also one of the drivers of the government’s actions to outlaw cryptocurrency. Cryptocurrency has some negative impacts, including its use by criminals for illegal activities. These activities often involve money laundering and purchasing illicit products and services. The government wanted to prevent these activities, so it proposed banning crypto to reduce the number of possible opportunities for criminals.
Major China Crypto Hacks
Several major crypto hacks and scams linked to China have gained global attention. Here are some key incidents:
Lazarus and Chinese Trader: The Lazarus Group, a North Korean hacker collective, made off with more than $200 million worth of cryptocurrency between 2020 and 2023. A Chinese trader identified as Yicong Wang came in handy to them in the process of distorting the stolen cryptocurrency into cash. He used some special tools to conceal the sources of the money, and some of his accounts were closed to prevent it.
Transfers in Chinese Accounts: Between 2019 and 2021, Chinese accounts transferred more than $2 billion associated with criminal activities, including scams. Even though scams have declined since then, China is still a high-risk region for cryptocurrency-related criminal activities owing to the lack of restrictions on certain forms of trading.
Ronin Bridge Hack: The Ronin Bridge platform was hacked in 2022, and the Lazarus hackers stole $625 million. The stolen money was hidden and transferred through many countries, including some Chinese traders, indicating that hackers are cross-border operators.
Court Case on Crypto Investment: In 2024, a Chinese investor lost 1.7 million yuan and then attempted to seek legal action against the crypto fraud. According to the court, the investor couldn’t reclaim their lost money as China has not embraced crypto investments.
Will China Ever Lift the Ban?
Although there are indications that Chinese authorities might explore the option of reintroducing cryptocurrency in the future, it is likely that this would be done in a regulated and cautious way. For instance, the Chinese are creating their official cryptocurrency, the digital yuan. While Bitcoin is decentralized, the Chinese government owns and regulates the digital yuan. Some analysts think that even though China is banning most of the digital assets now, it could one day permit more but only with certain conditions and regulations.
There haven’t been any official statements, but people are curious if China might change its position on crypto. As more countries legally allow digital currencies, there are more rumors that China could do the same.
Hong Kong’s Crypto Hub
While the rest of China has banned cryptocurrency, Hong Kong is not as strict. Being half an autonomous region, Hong Kong has more freedom to establish its policies and has warmly welcomed cryptocurrency.
The Hong Kong government has permitted those exchanges that are licensed and regulated for the protection of investors. The aim is to lure crypto firms, investors, and technological entrepreneurs to the city. While cryptocurrencies remain banned in mainland China, Hong Kong is positioning itself as a crypto-friendly hub. This approach draws investors and companies looking to expand within the Asian market.
The SFC, the territory’s primary financial regulator, oversees the regulation of cryptocurrency exchanges in Hong Kong. It began accepting applications for licensing in 2023. This program safeguards investors in the crypto space while promoting innovation. The market players like OSL and HashKey have already received full licenses, while the other 11, like Crypto.com, are waiting for approvals after passing all the necessary safety checks.
Such licenses grant crypto firms the legal permission to offer their services to the people of Hong Kong. It’s a positive development because it lets investors know that the companies they are trading with adhere to specific standard protocols to protect the investors.
Hong Kong Enhances OTC Crypto Regulation and OversightThe Future of Crypto in China
China’s strict regulations against cryptocurrency demonstrate the government’s desire to control financial systems. Despite the ban on other cryptocurrencies, China remains highly involved in blockchain technology. The government has also introduced its own digital currency, the digital yuan, as a state-controlled option for its citizens.
If China eventually decides to lift its cryptocurrency ban, it will likely enforce strict measures. This would help prevent issues like fraud, capital flight, and the environmental impact of crypto mining. Hong Kong serves as an example of where other countries in the region should aim to be regarding crypto developments.
Conclusion
China has had a roller-coaster relationship with cryptocurrency, with excitement in the early days, followed by caution and strict regulation. From early adoption to almost a complete ban, the country has adopted a policy focusing on control and economic stability. This is unlikely to change for the foreseeable future. However, Hong Kong’s status as a crypto-friendly hub may eventually impact mainland policies.
The Chinese government remains focused on its state-controlled digital currency, the digital yuan. It also closely monitors developments in Hong Kong and other countries. China’s conflict between control and crypto innovation highlights how governments struggle with disruptive new technologies. As traditional governance is challenged, the crypto story in China is far from over.
